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Over the years, few people have spent more time dissecting the stock market than Laszlo Birinyi, the founder of Birinyi Associates. Based in Westport, Conn., the boutique research firm crunches lots of market data and also runs a $250 million investment portfolio for clients. Its recent research has included takes on share buybacks, the diminishing contribution of dividends to total returns, and the importance of making money by avoiding losses. Birinyi, 69, spent many years at Salomon Brothers, where he headed equity-market analysis and worked closely with the trading desk. He founded his own firm in 1989. Birinyi has a bullish outlook on stocks, contending that the market's upward movement since March 2009 still has legs. Barron'sspoke with him recently by telephone.

Barron's:What's your sense of the market as 2013 approaches?

Birinyi: Since 2009, our attitude has been that we are in the midst of a protracted bull market, and we expect it to last at least five years from the onset. We are still comfortable with that view. With market forecasting, the best you can really do is get the seasons right. So, in our view, we are in the late summer or early fall of a bull market. We don't worry about the day-to-day fluctuations or, for example, the 5% movement over the next two weeks. If we can get the general direction right, trying to be more precise than that is difficult. So we see the market in the fourth and final phase of a long bull market.

Could you outline the four phases of a bull market?

The markets with which we compare this one are 1962, 1974, 1982, 1990, and 2002. Of course, they are not mathematically precise comparisons. But, basically, we find that there are four phases in a long bull market. The first one is reluctance. The cliché is a wall of worry, though it's not really that. It's more a sense of, "Oh, I missed it." There is a reluctance to believe that it really has changed. During the first leg, there tend to be very sharp gains. In fact, in the bull markets I cited, half of the gain in the ultimate bull market was made in the first leg, which is usually very strong. Next, there is a little consolidation, and in the third phase there is grudging acceptance. In the last phase, there is exuberance where nobody wants to be the last one in the pool. So that's where we are, in the fourth phase of a bull market.

But why have flows into stock mutual funds been so weak?

At some point, they should pick up, and one of the characteristics of stage four is the realization that "I missed it." That is why at the end, things are so strong, people give up fighting it.

But isn't there a lot of gloom and doom out there, whether it's worries about the sluggish economy, weak profit growth, or high unemployment?

"In the last phase [of a bull market] there is exuberance where nobody wants to be the last one in the pool. That's where we are." -- Laszlo Birinyi
Jennifer Allman for Barron's

That's been pretty consistent since 2009, but, in fact, the negative arguments have been consistently wrong since then. We save a lot of newspaper articles, including some from your publication, and in every quarter since '09, we have read about how it's going to be a tough quarter for earnings and how this quarter is really going to disappoint. That is very, very consistent. So, as I always remind people, the negative case for the stock market is always more articulate than the bullish case. It is always more rational and sounds more compelling, because a negative case is built on now, whereas the market is looking ahead. One of the shortcomings of today's process is that we don't look at the market enough. Instead, we do a lot of external activities and then go to the market. The recent presidential election is a very good example. There was all sorts of contention about what would happen if there were a tie. But if you look at the markets and InTrade, which is a real market in Dublin where individuals spend real money to buy or sell shares on an event, there was no wavering that President Obama would get re-elected. And in the last few days before the election, there was a lot of put-buying in defense stocks.

What is the market telling you now?

For one thing, there is great deal of concern about Europe. But
Porsche Automobil Holding
[POAHY], which is one of the main manufacturing companies in Germany, is up about 40% this year, and
BMW
[BAMXY] is up about the same.
BNP Paribas
[BNPQY], a French bank, is up a little more than 40% since the beginning of the year. To me, that's the market's response to the concern. If Europe is in as much trouble as the headlines suggest, you wouldn't expect those kinds of moves.

You've been at this for a long time. What are some common mistakes that strategists make?

People can use a lengthy analysis of profits and manufacturing goals and all sorts of important fundamental issues. But, at the end of the day, it is about what's going on in the market and what the market is saying. I see and read these lengthy reports which talk all about the economy and thesectors, and so forth. But when I look at the market, it is often in gross disagreement with that kind of analysis. You have to focus on what is going on in the market, whereas strategists too often are telling you what should be going on.

Are there any particularly good strategists whose work you follow?

Sadly, there are some people I keep an eye on because they are fairly consistently wrong. I have long been a critic of technical analysis, because it tries to do too much. A lot of technical tools are useful. I compare them to going to the doctor and having your blood pressure or your cholesterol levels taken. If you have high cholesterol, they tell you not to have steak with the meat sauce. But it doesn't mean that in six months, three days, and two hours you should be checking into the hospital. A lot of analysis is really commentary. What we try to do is understand what's going on in the market and not necessarily forecast the future.

In the fourth quarter of last year, the S&P 500 was up 11%. The argument was that you couldn't beat the market because there was so much correlation; everything was trading together. Well, we looked at that, and we looked at other quarters where the market was also up 10%, 11%. And we found that a year ago in the fourth quarter, 95 stocks in the S&P 500 had doubled the return of the S&P 500. We also found that about one-third of the stocks in the index had done 50% better than the S&P. And that was pretty much the norm in other, similar quarters. So the notion that I can't win because of all this correlation really wasn't a valid argument.

Birinyi's Picks

Recent

Company

Ticker

Price

Walgreen

WAG

$36.51

Sears Holdings

SHLD

$42.41

Apple

AAPL

$529.69

Source: Bloomberg

So I contend that the first opportunity in stocks is to look for the individual names on a bottoms-up basis. Then it is easier to dismiss some areas, rather than focus on them. For example, we are very, very light in financial stocks. We've done a lot of work on historical group rotation and group movements, and in strong bull markets, such as the one we are in, financial stocks make 45% of their gain in the first two months of a protracted bull market. Thereafter, for the most part, those stocks are market performers. So the cyclical stocks, such as the industrials and technology, are areas we are focusing on. And consumer-staple stocks tend to do well toward the end a bull market.

What's an example of a consumer-staple stock that you like?

One stock I own that we have been buying is
Walgreen
[WAG], the drugstore chain. I happen to like
Sears Holdings SHLD 1.2212306247064348%Sears Holdings Corp.U.S.: NasdaqUSD21.55
0.261.2212306247064348%
/Date(1438376400318-0500)/
Volume (Delayed 15m)
:
911282AFTER HOURSUSD21.55
%
Volume (Delayed 15m)
:
89035
P/E Ratio
N/AMarket Cap
2297272962.1109
Dividend Yield
N/ARev. per Employee
148985More quote details and news »SHLDinYour ValueYour ChangeShort position
[SHLD], which is a very controversial stock, and in owning it, one has to be very careful. It's certainly not for the grandchildren's trust account.

Why do you like Sears?

Real estate. We see a recovery in housing and the real-estate market, so that should help their sales. But they own their own real estate where their stores are situated, and as the real-estate market recovers, it should help them.

What about Walgreen?

[I like] the way it has held up in the face of a market decline. For example, I like stocks that go down on bad news, or as I like to call it, nonrecurring bad news. For example, we did very well in
News Corp.
[NWSA] when it had the issues in London with the phone-hacking scandal. Our view was this was a temporary issue. Yes, it was unfortunate and unpleasant, but the franchise is still intact. And those are the kinds of situations that intrigue us. [Editor's note: Barron's is part of Dow Jones, which is owned by News Corp.]

What do you like about Apple?

The fundamentals are still there. Some people have suggested that Apple's share of the tablet market will go under 50%. But I've never seen any other tablets that are a real threat to Apple. And every time I get on the subway, I mostly see iPhones.

A lot has been written about how Apple, whose market capitalization is $500 billion, influences the overall stock market because of its heft. What's your view?

It's not a major issue. There is always an Apple in the market. People were suggesting a few months ago that we should think about putting Apple in the Dow. But people said the same thing about
AOL
[AOL], which was the Apple of the late 1990s.

What's your advice to investors?

First of all, this is a profession that is as demanding as any other, including medicine or law. But too many individuals approach investing more like it's a salad bar. They hear a bunch of ideas, and then they go pick certain ones out. But we can't stress enough how hard one really has to work at this. My second point is that it's very important to do some research. People who tend to be available to appear on CNBC or be quoted in the financial press are articulate and intelligent and knowledgeable. But you should really be willing to do a little digging of your own.

Could you elaborate?

For those who are on TV or quoted in the financial press, one of their jobs is to be out there. But one of the things we do here is to approach everything with a bit of skepticism. And we find that a lot of times when we push back on an argument, it really doesn't hold water. For example, since 2009, which was literally at the beginning of the bull market, the argument was made that if you looked at the 10-year trailing, inflation-adjusted P/E [price/earnings ratio], the market was not cheap. That was the approach of Robert Shiller, an economics professor at Yale. This was when it turned out the market had hit bottom in March 2009. So here is someone whose approach never got you into the market, but that same approach keeps telling you that you should get out of the market. The last time that particular model was at this level—around 21 times earnings and rising—was in 1995, when the market went up 35%. I'm not saying that it is going to do that again. But what I am saying is that if you hear this argument, investors shouldn't bail and they shouldn't get into a defensive position. This June, for example, the Dow actually turned red for a couple of days. There were all sorts of commentaries that suggested circle the wagons and buy stocks that pay dividends, and cut back on your risk. And that was absolutely the wrong thing to do.

You and your colleagues wrote recently that dividends don't play as big a part in total returns as many think they do.

John F. Kennedy once said—and I'm paraphrasing—that the enemy of the truth is not the lie, but the myth. And there are so many myths in the markets that are so prevalent and that people don't even question. The conventional wisdom regarding stock-market returns attributes one-third to 40% of total return to dividends. But that has been declining. For example, in the current bull market, dividends have contributed about 9% to total returns. During the five-year bull market from October 2002 to October 2007, dividends also contributed about 9% of the total return.

My biggest mistake has been when I took my eyes off the ball and when I didn't interrogate the market—and when I didn't look to see what was happening in the market itself. In 1999, I was named to the Wall Street Week Hall of Fame and appeared on the year-end show for the sixth time in eight years. I was asked to speak in many venues, to appear here and there, and I spent more time on marketing than markets. As an old trader, keeping in close, direct touch with the market is critical, but that's hard to do when you are flying to Houston or Seattle.

You put out a note recently in which you pointed out that every year since 1962, the worst five days in terms of performance have a much bigger impact on annual returns than the best five days do. For example, the S&P 500 was down nearly 38% in 2008. But if you take way the worst five days, it had a modest gain of 1.36%.

It is fairly easy to develop a worst-case scenario. You can come up with Greece isn't going to make it. You can come up with all sorts of negative scenarios that are really going to impact in a very bad way. But it is hard to come up with positive scenarios that will have the same impact. That's the whole psychology behind it, because fear is a much greater emotion than real joy is. So your sense of being scared is probably twice as bad as being happy. I can think of a lot of real bad things, but it is hard to come up with something correspondingly good. That's what happens when we are scared: We react much more negatively than when we are not scared.